Intraday Market Thoughts

Central Bank Gridlock

by Adam Button
Sep 21, 2016 23:35

The trio of central bank decision on Wednesday highlighted the hope and skepticism that surrounds major economies. The yen was the top performer while the US dollar lagged. We break down the path forward.  The Premium Insights closed the GBPUSD and USDJPY trades at 230 and 250 pips respectively. 2 new trades were posted, one of which has been filled.

Click To Enlarge
Central Bank Gridlock - Performance Sep 22 2016 (Chart 1)

The yen strengthened throughout European and US trading to finish at the best levels of the day. The BOJ is betting that locking in JGB rates and promising to exceed the 2% inflation target will be the tonic that finally cures a generation of malaise. The FX market has already voted against it.

USD/JPY is now pushing against some critical technical and psychological levels as it finished on the lows at 100.30. It could get ugly quickly from here if real money follows up the central bank moves by buying the yen on Thursday.

The Fed didn't help by hiking rates, although three dissents and Yellen's comments show there will probably be a hike this year. In the press conference she said that so long as decent job gains continued and there weren't any shocks, surprises or a crisis, a hike is coming before year-end.

On the face of it, that's hawkish but it was combined with some troubling admissions in the longer term. Fed forecasts on growth and inflation were cut and that pushed US longer-term yields, and the dollar lower. Great post-Fed risk appetite also helped commodity currencies outperform USD.

Ultimately, it's proven extremely difficult to keep the US dollar down and sentiment could switch before the weekend.

The final central bank decision was the RBNZ. They too essentially maintained the status quo and combined that with a warning that rates will need to be cut and the NZD is too strong. Initially, NZD dropped a half-cent but it rebounded soon after. The question is: when will the promised cut come? The market had priced in a 50% chance of November but with the RBNZ saying Q3 CPI will rise in the statement, that's less likely.

Overall, the theme of economic optimism for the long-term has dwindled in 2016 yet the belief that inflation will rise hasn't. We ask: Is that compatible? Or is it a reflection of central banks relying on optimism because they don't have any ammunition left?

Looking ahead, the level to watch is 100 and in Asia-Pacific trading, we will be watching for any anti-JPY jawboning from Abe's team.


Latest IMTs